If the CAPM assumptions are true, then it follows that all investors hold the same portfolio. Is this statement true or...
If the CAPM assumptions are true, then it follows that all investors hold the same portfolio. Is this statement true or false? Explain why your answer makes sense.
Homework Answers
False.
If the CAPM assumptions are true, then it does not follow that all investors hold the same portfolio.
Each investor will hold a portfolio that is commensurate with their ability/tolerance for risk and their corresponding required return.
Investors who are less risk averse will hold more risky portfolios to earn a higher return. Investors who are more risk averse will hold less risky portfolios to earn a lower return.
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If the CAPM assumptions are true, then it follows that all investors hold the same portfolio. Is this statement true or...
(a) Suppose all the Capital Asset Pricing Model (CAPM) assumptions hold. If you would like to earn...
(a) Suppose all the Capital Asset Pricing Model (CAPM)
assumptions hold. If you would like to earn a risk
premium that is three times the market risk premium, what should
you do?
(b) Unlike part (a), suppose we cannot invest more than 200% in
any risky assets. Suppose all the other CAPM
assumptions still hold. If you would like to earn a risk
premium that is the same as part (a), what should you do
now? Briefly explain using the graph
below. (No calculations necessary.)...
Capital Asset Pricing Model (CAPM) a. What is two-fund portfolio separation and why is it important?...
Capital Asset Pricing Model (CAPM) a. What is two-fund portfolio separation and why is it important? b. Show graphically (in return-standard deviation space) how 2-fund separation works in the context of the CAPM. c. Explain and show how risk averse investors are better off with capital markets. d. What are some of the assumptions that need to hold in order for the CAPM to be applied and why are they important? e. Suppose a stock has a covariance with the...
Under CAPM, more risk-averse individuals hold a portfolio of risky assets that is tilted toward stocks...
Under CAPM, more risk-averse individuals hold a portfolio of risky assets that is tilted toward stocks with low covariance risk relative to the portfolio of risky assets held by less risk-averse individuals. II. III. True False Uncertain Why? 7
6. Assume CAPM holds: Are the following true or false? a. Stocks with a beta of...
6. Assume CAPM holds: Are the following true or false? a. Stocks with a beta of zero offer an expected rate of return of zero. b. The CAPM implies that investors require a higher return to hold highly volatile securities. c. You can construct a portfolio with beta of 75 by investing.75 of the investment budget in T-bills and the remainder in the market portfolio.
Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stoc...
Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion. I, II, and Ill only I, II, and IV only O 1, II, III, and IV II, III, and IV only...
Part 1. True or False Questions (5 Points Each) Instruction: Evaluate the statement in each question....
Part 1. True or False Questions (5 Points Each) Instruction: Evaluate the statement in each question. • If a statement is true, mark "True.” • If a statement is false, mark "False," and explain why it is false. 1. If CAPM holds, only the most risk averse investors hold the market portfolio. 2. If the market price of a stock is greater than its intrinsic value, investors should purchase the stock. 3. Diversification is most effective when security returns are...
In relation to the CAPM, indicate for each of the following statements whether it is true...
In relation to the CAPM, indicate for each of the following statements whether it is true or false and explain why. (a) Investors do not differ in their attitudes toward risk. (b) In equilibrium, all risky assets are priced such that their expected return lies on the security market line. (c) If a share's expected return is 4% and the expected return on the market portfolio is 15%, the share's beta must be negative. (d) Two securities with the same...
PLEASE EXPLAIN WHY ANSWER IS TRUE OR FALSE: "Risk aversion" implies that investors require higher expected...
PLEASE EXPLAIN WHY ANSWER IS TRUE OR FALSE: "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities. a. True b. False When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. a. True b. False An individual stock's diversifiable risk, which is measured...
which of the following statement is true regarding the selection of a portfolio from this e...
which of the following statement is true regarding the selection of a portfolio from this e that lie on the capital allocation line? a. less risk-averse investors will invest more in the risk -free security and less in the optimal risky portfolio than more risk averse investors. b. more risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk -averse investors. c. all investors will have the same capital allocation d....
5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's...
5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's already hold the value-weighted "market", or tangency, portfolio in order to apply the Capital Asset Pricing Model (CAPM). b. Does the risk-free asset need to exist in order for us to derive the CAPM? If not, how do investors achieve 2-fund separation? (Hint: Your textbook can help with this.)
(a) Suppose all the Capital Asset Pricing Model (CAPM)
assumptions hold. If you would like to earn a risk
premium that is three times the market risk premium, what should
you do?
(b) Unlike part (a), suppose we cannot invest more than 200% in
any risky assets. Suppose all the other CAPM
assumptions still hold. If you would like to earn a risk
premium that is the same as part (a), what should you do
now? Briefly explain using the graph
below. (No calculations necessary.)...
Capital Asset Pricing Model (CAPM) a. What is two-fund portfolio separation and why is it important? b. Show graphically (in return-standard deviation space) how 2-fund separation works in the context of the CAPM. c. Explain and show how risk averse investors are better off with capital markets. d. What are some of the assumptions that need to hold in order for the CAPM to be applied and why are they important? e. Suppose a stock has a covariance with the...
Under CAPM, more risk-averse individuals hold a portfolio of risky assets that is tilted toward stocks with low covariance risk relative to the portfolio of risky assets held by less risk-averse individuals. II. III. True False Uncertain Why? 7
6. Assume CAPM holds: Are the following true or false? a. Stocks with a beta of zero offer an expected rate of return of zero. b. The CAPM implies that investors require a higher return to hold highly volatile securities. c. You can construct a portfolio with beta of 75 by investing.75 of the investment budget in T-bills and the remainder in the market portfolio.
Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion. I, II, and Ill only I, II, and IV only O 1, II, III, and IV II, III, and IV only...
Part 1. True or False Questions (5 Points Each) Instruction: Evaluate the statement in each question. • If a statement is true, mark "True.” • If a statement is false, mark "False," and explain why it is false. 1. If CAPM holds, only the most risk averse investors hold the market portfolio. 2. If the market price of a stock is greater than its intrinsic value, investors should purchase the stock. 3. Diversification is most effective when security returns are...
In relation to the CAPM, indicate for each of the following statements whether it is true or false and explain why. (a) Investors do not differ in their attitudes toward risk. (b) In equilibrium, all risky assets are priced such that their expected return lies on the security market line. (c) If a share's expected return is 4% and the expected return on the market portfolio is 15%, the share's beta must be negative. (d) Two securities with the same...
5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's already hold the value-weighted "market", or tangency, portfolio in order to apply the Capital Asset Pricing Model (CAPM). b. Does the risk-free asset need to exist in order for us to derive the CAPM? If not, how do investors achieve 2-fund separation? (Hint: Your textbook can help with this.)
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